XFRA:BNK Blackbaud, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     .
Commission file number: 000-50600
 
BLACKBAUD, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
11-2617163
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2000 Daniel Island Drive
Charleston, South Carolina 29492
(Address of principal executive offices, including zip code)
(843) 216-6200
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer    ý
Accelerated filer                      
¨
Non-accelerated filer      ¨ (Do not check if a smaller reporting company)
Smaller reporting company    
¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
The number of shares of the registrant’s Common Stock outstanding as of July 25, 2012 was 45,181,811.




BLACKBAUD, INC.
TABLE OF CONTENTS
 
 
 
 
Page No.
PART I.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II.
 
 
Item 2.
 
Item 6.
 
 
 
 
Exhibit – 31.1
 
Exhibit – 31.2
 
Exhibit – 32.1
 
Exhibit – 32.2
 
Exhibit – 101
 

Safe Harbor Cautionary Statement
This Quarterly Report on Form 10-Q, including the section titled “Management's discussion and analysis of financial condition and results of operations” in Part I, Item 2, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our anticipated growth, the effect of general economic and market conditions, our business strategy and our plan to build and grow our business, our operating results, our ability to successfully integrate acquired businesses and technologies, the effect of foreign currency exchange rate and interest rate fluctuations on our financial results, the impact of expensing stock based compensation, the sufficiency of our capital resources, our ability to meet our ongoing debt and obligations as they become due, and potential litigation involving us, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “likely,” “will,” “should,” “believes,” “estimates,” “seeks,” variations of such words, and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that could cause actual results to differ materially from our expectations expressed in the report include: general economic risks; lengthy sales and implementation cycles, particularly in larger organizations; uncertainty regarding increased business and renewals from existing customers; continued success in sales growth; management of integration of recently acquired companies and other risks associated with acquisitions; the ability to attract and retain key personnel, including our new CFO; risk associated with successful implementation of multiple integrated software products; risks related to our dividend policy and stock repurchase program, including potential limitations on our ability to grow and the possibility that we might discontinue payment of dividends; risks relating to restrictions imposed by the credit facility; risks associated with management of growth; technological changes that make our products and services less competitive; and the other risk factors set forth from time to time in our SEC filings. Factors that could cause or contribute to such differences include, but are not limited to, those summarized under Risk Factors in our annual report on




Form 10-K for the year ended December 31, 2011 and our quarterly reports on Forms 10-Q. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this quarterly report on Form 10-Q. Except as required by law, we do not intend, and undertake no obligation to revise or update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.





PART I- FINANCIAL INFORMATION
Item 1.        Financial Statements
Blackbaud, Inc.
Consolidated balance sheets
(Unaudited) 
(in thousands, except share amounts)
June 30, 2012

 
December 31, 2011

Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
21,192

 
$
52,520

Donor restricted cash
18,314

 
40,205

Accounts receivable, net of allowance of $4,208 and $3,913 at June 30, 2012 and December 31, 2011, respectively
89,208

 
62,656

Prepaid expenses and other current assets
44,229

 
31,016

Deferred tax asset, current portion
1,959

 
1,551

Total current assets
174,902

 
187,948

Property and equipment, net
43,980

 
34,397

Deferred tax asset
774

 
29,376

Goodwill
262,568

 
90,122

Intangible assets, net
177,747

 
44,660

Other assets
8,458

 
6,087

Total assets
$
668,429

 
$
392,590

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
17,594

 
$
13,464

Accrued expenses and other current liabilities
37,506

 
32,707

Donations payable
18,314

 
40,205

Debt, current portion
165,000

 

Deferred revenue, current portion
175,076

 
153,665

Total current liabilities
413,490

 
240,041

Long-term debt, net of current portion
94,600

 

Deferred tax liability
1,348

 

Deferred revenue, net of current portion
9,177

 
9,772

Other liabilities
3,137

 
2,775

Total liabilities
521,752

 
252,588

Commitments and contingencies (see Note 9)

 

Stockholders’ equity:
 
 
 
Preferred stock; 20,000,000 shares authorized, none outstanding

 

Common stock, $0.001 par value; 180,000,000 shares authorized, 54,240,408 and 53,959,532 shares issued at June 30, 2012 and December 31, 2011, respectively
54

 
54

Additional paid-in capital
194,254

 
175,401

Treasury stock, at cost; 9,065,862 and 9,019,824 shares at June 30, 2012 and December 31, 2011, respectively
(167,646
)
 
(166,226
)
Accumulated other comprehensive loss
(1,601
)
 
(1,148
)
Retained earnings
121,616

 
131,921

Total stockholders’ equity
146,677

 
140,002

Total liabilities and stockholders’ equity
$
668,429

 
$
392,590

The accompanying notes are an integral part of these consolidated financial statements.

1



Blackbaud, Inc.
Consolidated statements of comprehensive income
(Unaudited)
(in thousands, except share and per share amounts)
Three months ended June 30,
 
Six months ended June 30,
2012

 
2011

 
2012

 
2011

Revenue
 
 
 
 
 
 
 
License fees
$
4,521

 
$
5,097

 
$
11,689

 
$
9,648

Subscriptions
37,923

 
25,885

 
65,985

 
49,802

Services
31,790

 
28,332

 
55,748

 
53,311

Maintenance
33,880

 
32,610

 
67,446

 
64,443

Other revenue
2,076

 
1,858

 
4,028

 
3,206

Total revenue
110,190

 
93,782

 
204,896

 
180,410

Cost of revenue
 
 
 
 
 
 
 
Cost of license fees
821

 
1,062

 
1,434

 
1,782

Cost of subscriptions
16,561

 
10,473

 
29,535

 
19,635

Cost of services
25,299

 
20,307

 
45,341

 
39,181

Cost of maintenance
6,178

 
6,035

 
12,155

 
12,286

Cost of other revenue
1,646

 
1,411

 
3,115

 
2,545

Total cost of revenue
50,505

 
39,288

 
91,580

 
75,429

Gross profit
59,685

 
54,494

 
113,316

 
104,981

Operating expenses
 
 
 
 
 
 
 
Sales and marketing
24,223

 
19,058

 
44,600

 
38,336

Research and development
14,856

 
11,527

 
28,160

 
23,493

General and administrative
21,753

 
9,176

 
36,254

 
18,378

Impairment of cost method investment
200

 

 
200

 

Amortization
530

 
246

 
727

 
479

Total operating expenses
61,562

 
40,007

 
109,941

 
80,686

Income (loss) from operations
(1,877
)
 
14,487

 
3,375

 
24,295

Interest income
33

 
45

 
80

 
78

Interest expense
(1,462
)
 
(60
)
 
(1,653
)
 
(84
)
Other income (expense), net
(140
)
 
216

 
(448
)
 
285

Income (loss) before provision for income taxes
(3,446
)
 
14,688

 
1,354

 
24,574

Income tax provision (benefit)
(1,175
)
 
5,326

 
866

 
7,919

Net income (loss)
$
(2,271
)
 
$
9,362

 
$
488

 
$
16,655

Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
(0.05
)
 
$
0.22

 
$
0.01

 
$
0.38

Diluted
$
(0.05
)
 
$
0.21

 
$
0.01

 
$
0.38

Common shares and equivalents outstanding
 
 
 
 
 
 
 
Basic weighted average shares
44,112,905

 
43,447,007

 
44,023,650

 
43,399,874

Diluted weighted average shares
44,112,905

 
44,098,046

 
44,659,678

 
44,004,712

Dividends per share
$
0.12

 
$
0.12

 
$
0.24

 
$
0.24

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustment
(168
)
 
(87
)
 
111

 
169

Unrealized loss on derivative instruments, net of tax
(564
)
 

 
(564
)
 

Total other comprehensive income (loss)
(732
)
 
(87
)
 
(453
)
 
169

Comprehensive income (loss)
$
(3,003
)
 
$
9,275

 
$
35

 
$
16,824

The accompanying notes are an integral part of these consolidated financial statements.

2



Blackbaud, Inc.
Consolidated statements of cash flows
(Unaudited)
 
 
Six months ended June 30,
(in thousands)
2012

 
2011

Cash flows from operating activities
 
 
 
Net income
$
488

 
$
16,655

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,223

 
8,170

Provision for doubtful accounts and sales returns
2,511

 
2,366

Stock-based compensation expense
9,624

 
7,325

Excess tax benefits from stock-based compensation
(340
)
 
(226
)
Deferred taxes
464

 
3,188

Impairment of cost method investment
200

 

Gain on sale of assets

 
(549
)
Other non-cash adjustments
177

 
(68
)
Changes in operating assets and liabilities, net of acquisition of businesses:
 
 
 
Accounts receivable
(16,135
)
 
(10,580
)
Prepaid expenses and other assets
(7,268
)
 
3,602

Trade accounts payable
643

 
1,355

Accrued expenses and other liabilities
(4,692
)
 
(2,132
)
Donor restricted cash
21,868

 
5,540

Donations payable
(21,868
)
 
(5,540
)
Deferred revenue
13,054

 
9,246

Net cash provided by operating activities
10,949

 
38,352

Cash flows from investing activities
 
 
 
Purchase of property and equipment
(11,568
)
 
(7,703
)
Purchase of net assets of acquired companies, net of cash acquired
(280,095
)
 
(16,475
)
Capitalized software development costs
(235
)
 
(506
)
Proceeds from sale of assets

 
719

Net cash used in investing activities
(291,898
)
 
(23,965
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of debt
312,000

 

Payments on debt
(52,400
)
 

Payments of deferred financing costs
(2,440
)
 
(767
)
Proceeds from exercise of stock options
2,984

 
1,925

Excess tax benefits from stock-based compensation
340

 
226

Dividend payments to stockholders
(10,830
)
 
(10,686
)
Payments on capital lease obligations

 
(25
)
Net cash provided by (used in) financing activities
249,654

 
(9,327
)
Effect of exchange rate on cash and cash equivalents
(33
)
 
363

Net increase (decrease) in cash and cash equivalents
(31,328
)
 
5,423

Cash and cash equivalents, beginning of period
52,520

 
28,004

Cash and cash equivalents, end of period
$
21,192

 
$
33,427


The accompanying notes are an integral part of these consolidated financial statements.

3



Blackbaud, Inc.
Consolidated statements of stockholders’ equity
(Unaudited)
 
(in thousands, except share amounts)
Common stock
 
 
Additional
paid-in
capital

 
Treasury
stock

 
Accumulated
other
comprehensive
loss

 
Retained
earnings

 
Total stockholders' equity

Shares

 
Amount

 
Balance at December 31, 2010
53,316,280

 
$
53

 
$
158,372

 
$
(161,186
)
 
$
(812
)
 
$
120,042

 
$
116,469

Net income

 

 

 

 

 
33,220

 
33,220

Payment of dividends

 

 

 

 

 
(21,429
)
 
(21,429
)
Exercise of stock options, stock appreciation rights and restricted stock units
262,428

 
1

 
2,040

 

 

 

 
2,041

Surrender of 176,942 shares upon restricted stock vesting and exercise of stock appreciation rights

 

 

 
(5,040
)
 

 

 
(5,040
)
Tax impact of exercise of equity-based compensation

 

 
193

 

 

 

 
193

Stock-based compensation

 

 
14,796

 

 

 
88

 
14,884

Restricted stock grants
502,426

 

 

 

 

 

 

Restricted stock cancellations
(121,602
)
 

 

 

 

 

 

Other comprehensive loss

 

 

 

 
(336
)
 

 
(336
)
Balance at December 31, 2011
53,959,532

 
$
54

 
$
175,401

 
$
(166,226
)
 
$
(1,148
)
 
$
131,921

 
$
140,002

Net income

 

 

 

 

 
488

 
488

Payment of dividends

 

 

 

 

 
(10,830
)
 
(10,830
)
Exercise of stock options, stock appreciation rights and restricted stock units
294,570

 

 
2,984

 

 

 

 
2,984

Surrender of 46,038 shares upon restricted stock vesting and exercise of stock appreciation rights

 

 

 
(1,420
)
 

 

 
(1,420
)
Tax impact of exercise of equity-based compensation

 

 
340

 

 

 

 
340

Stock-based compensation

 

 
9,670

 

 

 
37

 
9,707

Equity-based awards assumed in business combination

 

 
5,859

 

 

 

 
5,859

Restricted stock grants
50,868

 

 

 

 

 

 

Restricted stock cancellations
(64,562
)
 

 

 

 

 

 

Other comprehensive loss

 

 

 

 
(453
)
 

 
(453
)
Balance at June 30, 2012
54,240,408

 
$
54

 
$
194,254

 
$
(167,646
)
 
$
(1,601
)
 
$
121,616

 
$
146,677


The accompanying notes are an integral part of these consolidated financial statements.

4


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)



1. Organization
We provide on-premise and cloud-based software solutions and related services designed specifically for nonprofit organizations. Our products and services enable nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage their finances and optimize internal operations. As of June 30, 2012, we had over 27,000 active customers distributed across multiple verticals within the nonprofit market including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare and international foreign affairs.
2. Summary of significant accounting policies
Unaudited interim consolidated financial statements
The interim consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC) for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to state fairly the consolidated balance sheets, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of stockholders’ equity for the periods presented in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012 or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations for interim reporting of the SEC. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 and other forms filed with the SEC from time to time.
Basis of consolidation
The consolidated financial statements include the accounts of the Blackbaud, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Areas of the financial statements where estimates may have the most significant effect include revenue recognition, the allowance for sales returns and doubtful accounts, deferred sales commissions and professional services costs, valuation of derivative instruments, long-lived and intangible assets and goodwill, stock-based compensation, the provision for income taxes and valuation of deferred tax assets. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could materially differ from these estimates.
Revenue recognition
Our revenue is primarily generated from the following sources: (1) selling perpetual licenses of our software products; (2) charging for the use of our software products in a hosted environment; (3) providing professional services including implementation, training, consulting, analytic, hosting and other services; and (4) providing software maintenance and support services.

5


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)



License fees
We recognize revenue from the sale of perpetual software license rights when all of the following conditions are met:
Persuasive evidence of an arrangement exists;
The product has been delivered;
The fee is fixed or determinable; and
Collection of the resulting receivable is probable.
We deem acceptance of an agreement to be evidence of an arrangement. Delivery occurs when the product is shipped or transmitted, and title and risk of loss have transferred to the customers. Our typical license agreement does not include customer acceptance provisions; however, if acceptance provisions are provided, delivery is deemed to occur upon acceptance. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. Payment terms greater than 90 days are considered to be beyond our customary payment terms. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as they become due. If we determine that collection is not probable, we defer revenue recognition until collection.
We sell software licenses with maintenance, varying levels of professional services and, in certain instances, with hosting services. We allocate revenue to each of the elements in these arrangements using the residual method under which we first allocate revenue to the undelivered elements, typically the non-software license components, based on objective evidence of the fair value of the various elements. We determined the fair value of the various elements using different methods. Fair value for maintenance services associated with software licenses is based upon renewal rates stated in the agreements with customers, which vary according to the level of support service provided under the maintenance program. Fair value of professional services and other products and services is based on sales of these products and services to other customers when sold on a stand-alone basis. Any remaining revenue is allocated to the delivered elements which is normally the software license in the arrangement.
When a software license is sold with software customization services, generally the services are to provide customer support for assistance in creating special reports and other enhancements that will assist with efforts to improve operational efficiency and/or to support business process improvements. These services are not essential to the functionality of the software. However, when software customization services are considered essential to the functionality of the software, we recognize revenue for both the software license and the services on a percent-complete basis.
Subscriptions
We provide hosting services to customers who have purchased perpetual rights to certain of our software products (hosting services). Revenue from hosting services, as well as data enrichment services, data management services and online training programs is recognized ratably over the service period of the contract, which generally ranges from one to three years, upon deployment and use of the service. Any related set-up fees are recognized ratably over the estimated period that the customer benefits from the related fees.
We make certain of our software products available for use in hosted application arrangements without licensing perpetual rights to the software (hosted applications). Revenue from hosted applications is recognized over the subscription service period, which generally ranges from one to three years, upon deployment and use of the hosted application. Any revenue related to upfront activation, set-up or implementation fees is recognized ratably over the estimated period that the customer benefits from the related hosted application. Direct and incremental costs relating to activation, set-up and implementation for hosted applications are capitalized until the hosted application is deployed and in use, and then expensed over the estimated period that the customer benefits from the related hosted application.
For arrangements that have multiple elements and do not include software licenses, we allocate arrangement consideration at the inception of the arrangement to those elements that qualify as separate units of accounting. The arrangement consideration is allocated to the separate units of accounting based on relative selling price method in accordance with the selling price

6


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


hierarchy, which includes: (i) vendor specific objective evidence (VSOE) if available; (ii) third party evidence (TPE) if VSOE is not available; and (iii) best estimate of selling price if neither VSOE nor TPE is available. In general, we use VSOE to allocate the selling price to subscription and service deliverables.
Revenue from transaction processing fees is recognized when received. Credit card fees directly associated with processing donations for customers are included in subscriptions revenue, net of related transaction costs.
Services
We generally bill consulting, installation and implementation services based on hourly rates plus reimbursable travel-related expenses. Revenue is recognized for these services over the period the services are performed.
We recognize analytic services revenue from donor prospect research engagements, the sale of lists of potential donors, benchmarking studies and data modeling service engagements upon delivery. In arrangements where we provide customers the right to updates to the lists during the contract period, revenue is recognized ratably over the contract period.
We sell training at a fixed rate for each specific class at a per attendee price or at a packaged price for several attendees, and recognize the related revenue only upon the customer attending and completing training. Additionally, we sell fixed-rate programs, which permit customers to attend unlimited training over a specified contract period, typically one year, subject to certain restrictions, and revenue is recognized ratably over this contract period.
Maintenance
We recognize revenue from maintenance services ratably over the contract term, typically one year. Maintenance contracts are at rates that vary according to the level of the maintenance program and are generally renewable annually. Maintenance contracts also include the right to unspecified product upgrades on an if-and-when available basis. Certain support services are sold in prepaid units of time and recognized as revenue upon their usage.
Deferred revenue
To the extent that our customers are billed for the above described services in advance of delivery, we record such amounts in deferred revenue.
Fair value measurements
We measure certain financial assets and liabilities at fair value on a recurring basis, including derivative instruments. Fair value is defined as the exchange price that would be received upon purchase of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 - Quoted prices for identical assets or liabilities in active markets;
Level 2 - Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Our financial assets and liabilities are classified in their entirety within the hierarchy based on the lowest level of input that is significant to fair value measurement. Changes to a financial asset's or liability's level within the fair value hierarchy are determined as of the end of a reporting period.


7


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


Derivative instruments
We use derivative instruments to manage interest rate risk. We view derivative instruments as risk management tools and do not use them for trading or speculative purposes. Our policy requires that derivatives used for hedging purposes be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in the fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
We record all derivative instruments on our consolidated balance sheets at fair value. Gains and losses on derivatives designated as effective hedges are recorded in other comprehensive income and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. Gains and losses on ineffective hedges are recognized currently in earnings.
Goodwill
The change in goodwill for each reportable segment during the six months ended June 30, 2012 consisted of the following:
 
(in thousands)
ECBU
 
GMBU
 
IBU
 
Target Analytics
 
Other
 
Total
Balance at December 31, 2011
$
23,023

 
$
26,437

 
$
5,389

 
$
33,177

 
$
2,096

 
$
90,122

Additions related to business combinations
115,563

 
55,194

 
1,733

 

 

 
172,490

Effect of foreign currency translation

 

 
(44
)
 

 

 
(44
)
Balance at June 30, 2012
$
138,586

 
$
81,631

 
$
7,078

 
$
33,177

 
$
2,096

 
$
262,568


 Amortization expense
Amortization expense related to finite-lived intangible assets acquired in business combinations is allocated to cost of revenue and operating expenses on the consolidated statements of comprehensive income based on the revenue stream to which the asset contributes and the nature of the intangible asset. The following table summarizes amortization expense for the three and six months ended June 30, 2012 and 2011.
 
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2012

 
2011

 
2012

 
2011

Included in cost of revenue:
 
 
 
 
 
 
 
Cost of license fees
$
124

 
$
156

 
$
247

 
$
321

Cost of subscriptions
2,706

 
816

 
3,688

 
1,617

Cost of services
468

 
391

 
879

 
778

Cost of maintenance
250

 
253

 
494

 
505

Cost of other revenue
19

 
20

 
38

 
38

Total included in cost of revenue
3,567

 
1,636

 
5,346

 
3,259

Included in operating expenses
530

 
246

 
727

 
479

Total
$
4,097

 
$
1,882

 
$
6,073

 
$
3,738


Recently adopted accounting pronouncements
Effective January 1, 2012, we adopted ASU 2011-05, Presentation of Comprehensive Income, which (1) eliminates the option to present components of other comprehensive income, or OCI, as part of the statement of changes in stockholders’ equity and (2) requires the presentation of each component of net income and each component of OCI either in a single continuous statement or in two separate but consecutive statements. The adoption of ASU 2011-05 did not have a material impact on our consolidated financial statements. We have presented each component of net income and OCI in a single continuous statement.

8


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)



Effective January 1, 2012, we adopted ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, which amends ASC 820, Fair Value Measurement (ASC 820). ASU 2011-04 provides common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS) and improves the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. ASU 2011-04 is effective for entities prospectively for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on our consolidated financial statements.
3. Business combinations
Convio
In May 2012, we completed our acquisition of Convio, Inc. (Convio), for a total of approximately $329.4 million in cash consideration and the assumption of unvested equity awards valued at approximately $5.9 million for a total of $335.3 million. Convio is a leading provider of on-demand constituent engagement solutions that enable nonprofit organizations to more effectively raise funds, advocate for change and cultivate relationships. The acquisition of Convio expands our subscription and online offerings and accelerates our evolution to a subscription-based revenue model. As a result of the acquisition, Convio has become a wholly-owned subsidiary of ours. The results of operations of Convio are included in our consolidated financial statements from the date of acquisition. Since the date of acquisition through June 30, 2012, total revenue from Convio was $10.6 million and cost of revenue was $7.3 million. During the six months ended June 30, 2012, we incurred $6.4 million of acquisition-related costs associated with the acquisition of Convio, which were recorded in general and administrative expense.
We financed the acquisition of Convio through cash on hand and borrowings of $312.0 million under our credit facility that we amended in February 2012. In connection with closing the Convio acquisition, we designated Convio as a material domestic subsidiary under our credit facility. As a material domestic subsidiary, Convio guarantees amounts outstanding under the credit facility and pledges certain stock of its subsidiaries.
Management is currently in the process of estimating the purchase price allocation for this transaction. The following table summarizes the preliminary allocation of the purchase price based on the estimated fair value of the assets acquired and the liabilities assumed:
(in thousands)
 
Net working capital, excluding deferred revenue
$
55,581

Property and equipment
6,497

Deferred tax asset and other long term assets
75

Deferred revenue
(7,917
)
Deferred tax liability
(29,833
)
Intangible assets and liabilities
138,450

Goodwill
172,481

 
$
335,334



9


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


The estimated fair value of accounts receivable acquired approximates the contractual value of $12.8 million. The goodwill recognized is attributable primarily to the assembled workforce of Convio and the opportunities for expected synergies. None of the goodwill arising in the acquisition is deductible for income tax purposes. Goodwill of $115.6 million, $55.2 million, and $1.7 million was assigned to the ECBU, GMBU and IBU reporting segments, respectively. The acquisition resulted in the identification of the following identifiable intangible assets:
 
Intangible assets acquired

 
Weighted average amortization period

 
 (in thousands)

 
(in years)

Customer relationships
$
49,000

 
15

Marketing assets
7,800

 
7

Acquired technology
71,000

 
8

In-process research and development
9,900

 
Indefinite

Non-compete agreements
1,440

 
2

Unfavorable leasehold interests
(690
)
 
7

 
$
138,450

 
 

The fair value of the intangible assets was based on the income approach, cost approach, relief of royalty rate method and excess earnings methods. Customer relationships are amortized on an accelerated basis. Marketing assets, acquired technology and non-compete agreements are amortized on a straight-line basis.

The following unaudited pro forma condensed consolidated results of operations are provided for illustrative purposes only and assume that the acquisition of Convio occurred on January 1, 2011. This unaudited pro forma financial information does not reflect any adjustments for anticipated synergies resulting from the acquisition and should not be relied upon as being indicative of the historical results that would have been attained had the transaction been consummated as of January 1, 2011, or of the results that may occur in the future.
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands, except per share amounts)
2012
 
2011
 
2012
 
2011
Revenue
$
118,789

 
$
114,434

 
$
234,364

 
$
219,325

Net income (loss)
$
(1,914
)
 
$
5,249

 
$
(5,979
)
 
$
6,953

Basic earnings (loss) per share
$
(0.04
)
 
$
0.12

 
$
(0.14
)
 
$
0.16

Diluted earnings (loss) per share
$
(0.04
)
 
$
0.12

 
$
(0.14
)
 
$
0.16

4. Earnings (loss) per share
We compute basic earnings (loss) per share by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares and dilutive potential common shares then outstanding. Diluted earnings (loss) per share reflect the assumed conversion of all dilutive securities using the treasury stock method. Dilutive potential common shares consist of shares issuable upon the exercise of stock options, settlement of stock appreciation rights and vesting of restricted stock awards and units.

10


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
  
Three months ended June 30,
 
Six months ended June 30,
(in thousands, except share and per share amounts)
2012

 
2011

 
2012

 
2011

Numerator:
 
 
 
 
 
 
 
Net income (loss), as reported
$
(2,271
)
 
$
9,362

 
$
488

 
$
16,655

Denominator:
 
 
 
 
 
 
 
Weighted average common shares
44,112,905

 
43,447,007

 
44,023,650

 
43,399,874

Add effect of dilutive securities:
 
 
 
 
 
 
 
Employee equity-based compensation

 
651,039

 
636,028

 
604,838

Weighted average common shares assuming dilution
44,112,905

 
44,098,046

 
44,659,678

 
44,004,712

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
(0.05
)
 
$
0.22

 
$
0.01

 
$
0.38

Diluted
$
(0.05
)
 
$
0.21

 
$
0.01

 
$
0.38


The following shares and potential shares underlying stock-based awards were not included in diluted earnings (loss) per share because their inclusion would have been anti-dilutive:
 
  
Three months ended June 30,
 
Six months ended June 30,
  
2012

 
2011

 
2012

 
2011

Shares excluded from calculations of diluted earnings (loss) per share
753,365

 
83,975

 
75,399

 
380,914

5. Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following as of June 30, 2012 and December 31, 2011:
 
(in thousands)
June 30, 2012

 
December 31, 2011

Deferred sales commissions
$
17,511

 
$
16,452

Prepaid software maintenance and royalties
11,201

 
7,007

Taxes, prepaid and receivable
4,835

 
343

Deferred professional services costs
2,930

 
3,098

Other
7,752

 
4,116

Total prepaid expenses and other current assets
$
44,229

 
$
31,016



11


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


6. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following as of June 30, 2012 and December 31, 2011:
 
(in thousands)
June 30, 2012

 
December 31, 2011

Taxes payable
$
8,579

 
$
4,384

Accrued commissions and salaries
6,685

 
6,475

Accrued bonuses
4,794

 
9,832

Customer credit balances
3,748

 
3,762

Accrued royalties
2,057

 
1,418

Accrued health care costs
1,457

 
996

Accrued accounting, legal and professional fees
1,587

 
1,490

Other
8,599

 
4,350

Total accrued expenses and other current liabilities
$
37,506

 
$
32,707

7. Debt
Credit facility
In February 2012, we amended and restated our credit facility to a $325.0 million five-year credit facility. The credit facility includes the following facilities: (i) a dollar and a designated currency revolving credit facility with sublimits for letters of credit and swingline loans, and (ii) a delayed draw term loan. The credit facility is secured by the stock and limited liability company interests of certain subsidiaries that were pledged as part of the closing. Amounts outstanding under the credit facility will be guaranteed by our material domestic subsidiaries, if any.
Amounts borrowed under the dollar tranche revolving credit loans and delayed draw term loans under the credit facility bear interest at a rate per annum equal to, at our option, (a) a base rate equal to the highest of (i) the prime rate, (ii) federal funds rate plus 0.50% and (iii) one month LIBOR plus 1% (Base Rate), in addition to a margin of 0.25% to 1.25% (Base Rate Loans), or (b) the LIBOR rate plus a margin of 1.25% to 2.25% (LIBOR Loans). Swingline loans bear interest at a rate per annum equal to the Base Rate plus a margin of 0.25% to 1.25% or such other rate agreed to between the Swingline lender and us. Designated currency tranche revolving credit loans bear interest at a rate per annum equal to the LIBOR rate plus a margin of 1.25% to 2.25%. The exact amount of any margin depends on the nature of the loan and our leverage ratio at the time of the borrowing.
We also pay a quarterly commitment fee on the unused portion of the revolving credit facility from 0.20% to 0.35% per annum, depending on our leverage ratio. At June 30, 2012, the commitment fee was 0.35%.
Under the credit facility, we have the ability to choose either Base Rate Loans or LIBOR Loans. Base Rate borrowings mature in February 2017. LIBOR Loans can be one, two, three or six month maturities (or, if agreed to by the applicable lenders, nine or twelve months), and we have the ability to extend the maturity of these loans by rolling them at their maturity into new loans with the same or longer maturities. We evaluate the classification of our debt based on the maturity of individual borrowings and any roll-over of borrowings subsequent to the balance sheet date, but prior to issuance of the consolidated financial statements.
The credit facility includes covenants related to the consolidated leverage ratio and consolidated interest ratio, as well as restrictions on the maximum amount of annual capital expenditures. At June 30, 2012, we were in compliance with our debt covenants under the credit facility.

12


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


The following table summarizes our debt as of June 30, 2012. We had no borrowings outstanding as of December 31, 2011. The effective interest rate includes our interest cost incurred and the effect of interest rate swap agreements.
 
Debt balance at

 
Effective interest rate at

(in thousands, except percentages)
June 30, 2012

 
June 30, 2012

Credit facility:
 
 
 
    Revolving credit loans
$
162,100

 
2.74
%
    Term loans
97,500

 
3.14
%
        Total debt
259,600

 
2.89
%
Less: Current portion of long-term debt
165,000

 
 
Long-term debt
$
94,600

 
 

We believe the carrying amount of our credit facility approximates its fair value at June 30, 2012, due to the variable rate nature of the debt. As LIBOR rates are observable at commonly quoted intervals, it is classified within Level 2 of the fair value hierarchy.
As of June 30, 2012, the required annual maturities related to our credit facility were as follows:
Year ending December 31,
(in thousands)
 
2012 - remaining
$
160,000

2013
10,000

2014
13,750

2015
15,000

2016
15,000

Thereafter
45,850

Total required maturities
$
259,600

Deferred financing costs
In connection with our credit facility entered into in February 2012, we paid $2.4 million of financing costs, which is being amortized over the term of the new facility. As of June 30, 2012 and December 31, 2011, deferred financing costs totaling $2.8 million and $0.8 million, respectively, are included in other assets on the consolidated balance sheet.


13


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


8. Derivative instruments
We use derivative instruments to manage interest rate risk. In May 2012, we entered into two interest rate swap agreements which effectively convert portions of our variable rate debt under our credit facility to a fixed rate for the terms of the swap agreements. The aggregate notional value of the swap agreements was $150 million with effective dates beginning in May 2012. We designated the swap agreements as cash flow hedges at the inception of the contracts.
The fair values of our derivative instruments as of June 30, 2012 were as follows:
 
As of June 30, 2012
 
Liabilities
(in thousands)
Balance Sheet Location
 
Fair Value

Derivative instruments designated as hedging instruments:
 
 
 
Interest rate swaps
Other liabilities
 
$
925

Total derivative instruments designated as hedging instruments
 
 
$
925

We did not have derivative instruments as of December 31, 2011. The fair value of our interest rate swaps was based on model-driven valuations using LIBOR rates, which are observable at commonly quoted intervals. Accordingly, our interest rate swaps are classified within Level 2 of the fair value hierarchy.
The effects of derivative instruments in cash flow hedging relationships for the three and six months ended June 30, 2012 were as follows:
 
Loss recognized in accumulated other comprehensive loss
 
Location of loss reclassified from accumulated other comprehensive loss into income
 
Loss reclassified from accumulated other comprehensive loss into income
 
June 30,

 
 
Three months ended June 30,

 
Six months ended June 30,

(in thousands)
2012

 
 
2012

 
2012

Interest rate swaps
$
(925
)
 
Interest expense
 
$
(64
)
 
$
(64
)
The tax benefit allocated to the loss recognized in accumulated other comprehensive loss was $0.4 million for the three and six months ended June 30, 2012. There was no ineffective portion of our interest swaps during the six months ended June 30, 2012.
9. Commitments and contingencies
Leases
We lease our headquarters facility under a 15-year lease agreement which was entered into in October 2008, and has two five-year renewal options. The current annual base rent of the lease is $4.0 million payable in equal monthly installments. The base rent escalates annually at a rate equal to the change in the consumer price index, as defined in the agreement, but not to exceed 5.5% in any year. In addition, under the terms of the lease, the lessor will reimburse us an aggregate amount of $4.0 million for leasehold improvements, which will be recorded as a reduction to rent expense ratably over the term of the lease. During each of the three and six month periods ended June 30, 2012 and 2011 rent expense was reduced by $67,000 and $134,000, respectively, related to this lease provision. The $4.0 million leasehold improvement allowance has been included in the table of operating lease commitments below as a reduction in our lease commitments ratably over the then remaining life of the lease from October 2008. The timing of the reimbursements for the actual leasehold improvements may vary from the amount reflected in the table below.
In our acquisition of Convio, we also assumed a lease for office space in Austin, Texas which terminates on September 30, 2023, and has two five-year renewal options. Under the terms of the lease, we will increase our leased space by approximately 20,000 square feet on July 31, 2016. The current annual base rent of the lease is $2.0 million. The terms of the agreement include a rent holiday during the first year and base rent that escalates annually thereafter between 2% and 4%. The related rent expense is recorded on a straight-line basis over the length of the lease term. In addition, we are entitled to an allowance of approximately $3.3 million from the lessor for leasehold improvements, allocated among the existing and new expansion

14


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


premises. We have a standby letter of credit for a security deposit for this lease of $2.0 million.
Additionally, we have subleased a portion of our facilities under various agreements extending through 2013. Under these agreements, rent expense was reduced by $0.1 million during both the three months ended June 30, 2012 and 2011, respectively, and $0.2 million during both the six months ended June 30, 2012 and June 30, 2011, respectively. The operating lease commitments in the table below have been reduced by minimum aggregate sublease commitments of $0.2 million for 2012; the amount in 2013 is immaterial. No minimum aggregate sublease commitments exist after 2013. We have also received, and expect to receive through 2023, quarterly South Carolina state incentive payments as a result of locating our headquarters facility in Berkeley County, South Carolina. These amounts are recorded as a reduction of rent expense and were $0.6 million and $0.5 million for the three months ended June 30, 2012 and 2011, respectively, and $1.1 million and $1.2 million for the six months ended June 30, 2012 and 2011, respectively. Total rent expense was $1.1 million and $1.4 million for the three months ended June 30, 2012 and 2011, respectively and $2.5 million and $2.4 million for the six months ended June 30, 2012 and 2011, respectively.
Additionally, we lease various office space and equipment under operating leases. We also have various non-cancelable capital leases for computer equipment and furniture that are not significant.
 As of June 30, 2012, the future minimum lease commitments related to lease agreements, net of related sublease commitments and lease incentives, were as follows:
 
Year ending December 31,
Operating

(in thousands)
leases

2012 – remaining
$
4,934

2013
9,977

2014
8,687

2015
8,269

2016
7,487

Thereafter
52,650

Total minimum lease payments
$
92,004

Other commitments
We utilize third-party relationships in conjunction with our products, with contractual arrangements varying in length from one to three years. In certain cases, these arrangements require a minimum annual purchase commitment. As of June 30, 2012, the remaining aggregate minimum purchase commitment under these arrangements is approximately $16.4 million through 2014. We incurred expense under these arrangements of $2.5 million and $1.2 million for the three months ended June 30, 2012 and 2011, respectively, and $4.1 million and $2.3 million for the six months ended June 30, 2012 and 2011, respectively.
Legal contingencies
We are subject to legal proceedings and claims that arise in the ordinary course of business. We record an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We do not believe the amount of potential liability with respect to these actions will have a material adverse effect upon our consolidated financial position, results of operations or cash flows.


15


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


10. Income taxes
We calculated the provision for income taxes for the three and six months ended June 30, 2012 using the 2012 projected annual effective tax rate of 47.9%, which excludes period-specific items. Our effective tax rate, including the effects of period-specific events, was as follows:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
2012

 
2011

 
2012

 
2011

Effective tax rate
34.1
%
 
36.3
%
 
64.0
%
 
32.2
%

There were no material period-specific items recorded in the three and six months ended June 30, 2012. Period-specific items recorded in the three and six months ended June 30, 2011 included a decrease of $1.0 million in the valuation allowance for certain state net operating loss carryforwards, which reduced income tax expense. The increase in our effective tax rate during the six months ended June 30, 2012 compared to the same period in 2011 was primarily a result of the expiration of the federal research and development tax credit at the end of 2011, certain nondeductible transaction costs associated with the purchase of Convio, a lower percentage of our profits being earned in lower rate international jurisdictions and the impact of permanent and discrete items as a percentage of year-to-date pretax income relative to the expected full year pretax income.
We have deferred tax assets for, among other items, federal net operating loss carryforwards, state net operating loss carryforwards, and state tax credits. A portion of the state net operating loss carryforwards and state tax credits have a valuation reserve due to the uncertainty of realizing such carryforwards and credits in the future. Additionally, we have a valuation allowance for certain state deferred tax assets.
We recorded net excess tax benefits on stock option and stock appreciation right exercises and restricted stock vesting of $0.3 million and $0.2 million in stockholders’ equity during the six months ended June 30, 2012 and 2011, respectively.
The total amount of unrecognized tax benefit that, if recognized, would favorably affect the effective tax rate, was $1.8 million at June 30, 2012. We recognize accrued interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. The total amount of accrued interest and penalties was not material to the consolidated balance sheets as of June 30, 2012 or December 31, 2011, or to the consolidated statements of comprehensive income for the three and six months ended June 30, 2012 or 2011.
We have taken positions in certain taxing jurisdictions related to state nexus issues for which it is reasonably possible that the total amounts of unrecognized tax benefits might decrease within the next twelve months. This possible decrease could result from the finalization of state income tax reviews and the expiration of statutes of limitations. The reasonably possible decrease was not material at June 30, 2012.
It continues to be our intention to indefinitely reinvest undistributed foreign earnings. Accordingly, no deferred tax liability has been recorded in connection with the undistributed foreign earnings. It is not practicable for us to determine the amount of the unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries.
11. Stock-based compensation
During the six months ended June 30, 2012, we issued 50,868 shares of restricted stock and 61,842 stock appreciation rights with an aggregate grant date fair value of approximately $1.4 million and $0.5 million, respectively. In addition, we assumed 63,439 stock options and 331,196 restricted stock units in the acquisition of Convio. No stock options or performance-based restricted stock units were issued in the six months ended June 30, 2012.

16


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


Stock-based compensation expense is allocated to expense categories on the consolidated statements of comprehensive income based on where the associated employee’s compensation is recorded. The following table summarizes stock-based compensation expense for the three and six months ended June 30, 2012 and 2011.
 
  
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2012

 
2011

 
2012

 
2011

Included in cost of revenue:
 
 
 
 
 
 
 
Cost of subscriptions
$
245

 
$
225

 
$
426

 
$
327

Cost of services
565

 
447

 
1,057

 
904

Cost of maintenance
89

 
138

 
200

 
380

Total included in cost of revenue
899

 
810

 
1,683

 
1,611

Included in operating expenses:
 
 
 
 
 
 
 
Sales and marketing
603

 
272

 
1,020

 
629

Research and development
847

 
671

 
1,498

 
1,514

General and administrative
3,439

 
1,777

 
5,423

 
3,572

Total included in operating expenses
4,889

 
2,720

 
7,941

 
5,715

Total
$
5,788

 
$
3,530

 
$
9,624

 
$
7,326

12. Stockholders’ equity
Dividends
In February 2012, our Board of Directors approved an annual dividend of $0.48 per share. The following table provides information with respect to quarterly dividends paid on common stock during the six months ended June 30, 2012.
Declaration Date
Dividend per Share

Record Date
Payable Date
February 2012
$
0.12

March 5
March 15
May 2012
$
0.12

May 25
June 15
In August 2012, our Board of Directors declared a third quarter dividend of $0.12 per share payable on September14, 2012 to stockholders of record on August 28, 2012.
13. Segment information
As of June 30, 2012, our reportable segments were as follows: the ECBU, the GMBU, the IBU, and Target Analytics. Following is a description of each reportable segment:
The ECBU is focused on marketing, sales, delivery and support to large and/or strategic, specifically identified named prospects and customers in North America;
The GMBU is focused on marketing, sales, delivery and support to all emerging and mid-sized prospects and customers in North America that are not specifically identified as ECBU prospects and customers;
The IBU is focused on marketing, sales, delivery and support to all prospects and customers outside of North America; and
Target Analytics is focused on marketing, sales and delivery of analytics services to all prospects and customers in North America.

17


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


Our chief operating decision maker is our chief executive officer, or CEO. The CEO reviews financial information presented on an operating segment basis for the purposes of making certain operating decisions and assessing financial performance. The CEO uses internal financial reports that provide segment revenues and operating income, excluding stock-based compensation expense, amortization expense, depreciation expense, research and development expense and certain corporate sales, marketing, general and administrative expenses. The CEO believes that the exclusion of these costs allows for a better understanding of the operating performance of the operating units and management of other operating expenses and cash needs. The CEO does not review any segment balance sheet information.
We have recast our segment disclosures for the three and six months ended June 30, 2011 to present the reportable segments on a consistent basis with the current year. Summarized reportable segment financial results for the three and six months ended June 30, 2012 and 2011 were as follows:
 
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2012

 
2011

 
2012

 
2011

Revenue by segment:
 
 
 
 
 
 
 
ECBU
$
41,649

 
$
31,641

 
$
75,491

 
$
60,833

GMBU
49,703

 
44,701

 
93,534

 
86,512

IBU
10,330

 
8,431

 
19,000

 
15,738

Target Analytics
8,497

 
9,008

 
16,860

 
17,257

Other(1)
11

 
1

 
11

 
70

Total revenue
$
110,190

 
$
93,782

 
$
204,896

 
$
180,410

Segment operating income(2):
 
 
 
 
 
 
 
ECBU
16,512

 
12,803

 
31,413

 
24,558

GMBU
29,904

 
27,077

 
55,099

 
50,569

IBU
1,780

 
1,400

 
2,633

 
2,956

Target Analytics
3,509

 
4,085

 
6,784

 
7,737

Other(1) 
42

 
179

 
283

 
359

 
51,747

 
45,544

 
96,212

 
86,179

Less:
 
 
 
 
 
 
 
Corporate unallocated costs(3)
43,739

 
25,645

 
77,140

 
50,820

Stock-based compensation costs
5,788

 
3,530

 
9,624

 
7,326

Amortization expense
4,097

 
1,882

 
6,073

 
3,738

Interest expense (income), net
1,429

 
15

 
1,573

 
6

Other expense (income), net
140

 
(216
)
 
448

 
(285
)
Income (loss) before provision for income taxes
$
(3,446
)
 
$
14,688

 
$
1,354

 
$
24,574


(1)
Other includes revenue and the related costs from the sale of products and services not directly attributable to an operating segment.
(2)
Segment operating income includes direct, controllable costs related to the sale of products and services by the reportable segment, except for IBU, which includes operating costs from our foreign locations such as sales, marketing, general, administrative, depreciation and facilities costs.
(3)
Corporate unallocated costs include research and development, data center operating costs, depreciation expense, and certain corporate sales, marketing, general and administrative expenses.


18


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)


14. Revision of prior period financial statements
As previously disclosed in our Annual Report on Form 10-K for the period ended December 31, 2011, we identified prior period errors related principally to revenue recognition, accounting for income taxes and the capitalization of software development costs during the six months ended December 31, 2011. These errors impacted reporting periods beginning in the year ended December 31, 2006 and subsequent periods through September 30, 2011.
We concluded these errors were not material individually or in the aggregate to any of the prior reporting periods, and therefore, amendments of previously filed reports were not required. However, the cumulative error would have been material in the year ended December 31, 2011, if the entire correction was recorded in the fourth quarter of 2011. As such, the revisions for these corrections to the applicable prior periods are reflected in the financial information herein and will be reflected in future filings containing such financial information. In addition to recording these correcting adjustments, we recorded other adjustments to prior period amounts to correct other immaterial out-of-period adjustments, including those that had been previously disclosed. The consolidated statement of stockholders’ equity was revised to reflect the cumulative effect of these adjustments resulting in a decrease to additional paid-in capital of $0.1 million, a decrease to accumulated other comprehensive income of $0.3 million and a decrease to retained earnings of $6.2 million as of December 31, 2010.
The prior period financial statements included in this filing have been revised to reflect the corrections of these errors, the effects of which have been provided in summarized format below.
Revised consolidated statements of comprehensive income amounts
 
 
Three months ended June 30, 2011
 
Six months ended June 30, 2011
 
 
As previously

 
 
 
 
 
As previously

 
 
 
 
(in millions, except share and per share amounts)
 
reported

 
Adjustment

 
As revised

 
reported

 
Adjustment

 
As revised

Revenue
 
 
 
 
 
 
 
 
 
 
 
 
  License fees
 
$
5.1

 
$

 
$
5.1

 
$
9.7

 
$

 
$
9.7

  Subscriptions
 
25.9

 

 
25.9

 
51.4

 
(1.6
)
 
49.8

  Services
 
28.0

 
0.3

 
28.3

 
52.0

 
1.3

 
53.3

  Maintenance
 
32.6

 

 
32.6

 
64.4

 

 
64.4

  Other revenue
 
1.8

 
0.1

 
1.9

 
3.2

 

 
3.2

Total revenue
 
93.4

 
0.4

 
93.8

 
180.7

 
(0.3
)
 
180.4

Cost of revenue
 
 
 
 
 
 
 
 
 
 
 
 
  Cost of license fees
 
1.0

 
0.1

 
1.1

 
1.7

 
0.1

 
1.8

  Cost of services
 
20.2

 
0.1

 
20.3

 
39.2

 

 
39.2

Total cost of revenue
 
39.1

 
0.2

 
39.3

 
75.4

 

 
75.4

Gross profit
 
54.3

 
0.2

 
54.5

 
105.3

 
(0.3
)
 
105.0

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
 
  Sales and marketing
 
19.0

 
0.1

 
19.1

 
38.4

 
(0.1
)
 
38.3

  Research and development
 
12.0

 
(0.5
)
 
11.5

 
24.0

 
(0.5
)
 
23.5

Total operating expenses
 
40.5

 
(0.5
)
 
40.0

 
81.2

 
(0.5
)
 
80.7

Income from operations
 
13.8

 
0.7

 
14.5

 
24.1

 
0.2

 
24.3

Income before provision for income taxes
 
14.0

 
0.7

 
14.7

 
24.3

 
0.3

 
24.6

  Income tax provision
 
5.1

 
0.2

 
5.3

 
7.8

 
0.1

 
7.9

Net income
 
8.9

 
0.5

 
9.4

 
16.5

 
0.2

 
16.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
  Basic
 
$
0.21

 
$
0.01

 
$
0.22

 
$
0.38

 
$

 
$
0.38

  Diluted
 
$
0.20

 
$
0.01

 
$
0.21

 
$
0.38

 
$

 
$
0.38

 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
  Foreign currency translation adjustment
 

 
(0.1
)
 
(0.1
)
 

 
0.1

 
0.1

Comprehensive income
 
8.9

 
0.4

 
9.3

 
16.5

 
0.3

 
16.8


19


Blackbaud, Inc.
Notes to consolidated financial statements
(Unaudited)



Revised consolidated statements of cash flow amounts
  
Six months ended June 30,
 
As previously

 
 
 
 
(in millions)
reported

 
Adjustment

 
As revised

Net income
$
16.5

 
$
0.2

 
$
16.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
8.1

 
0.1

 
8.2

Deferred taxes
2.5

 
0.7

 
3.2

Gain on sale of assets

 
(0.5
)
 
(0.5
)
Other non-cash adjustments
(0.6
)
 
0.5

 
(0.1
)
Changes in assets and liabilities, net of acquisition of businesses:
 
 
 
 
 
Prepaid expenses and other assets
5.2

 
(1.6
)
 
3.6

Accrued expenses and other current liabilities
(3.0
)
 
0.9

 
(2.1
)
Deferred revenue
9.0

 
0.2

 
9.2

Net cash provided by operating activities
37.8

 
0.6

 
38.4

Capitalized software development

 
(0.5
)
 
(0.5
)
Net cash used in investing activities
(23.5
)
 
(0.5
)
 
(24.0
)
Net cash used in financing activities
(9.3
)
 

 
(9.3
)
 

20


Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements reflect our current view with respect to future events and financial performance and are subject to risks and uncertainties, including those set forth under “Safe Harbor Cautionary Statement” above and elsewhere in this report, that could cause actual results to differ materially from historical or anticipated results. Except as required by law, we do not intend, and undertake no obligation to revise or update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Executive summary
We provide on-premise and cloud-based software solutions and related services designed specifically for nonprofit organizations. Our products and services enable nonprofit organizations to increase donations, reduce fundraising costs, improve communications with constituents, manage their finances and optimize internal operations. As of June 30, 2012, we had over 27,000 active customers distributed across multiple verticals within the nonprofit market including education, foundations, health and human services, religion, arts and cultural, public and societal benefits, environment and animal welfare and international foreign affairs.
We derive revenue from selling perpetual licenses or charging for the use of our software products in a hosted environment and providing a broad offering of services, including consulting, training, installation and implementation services, as well as ongoing customer support and maintenance. Consulting, training and implementation are generally not essential to the functionality of our software products and are sold separately. Furthermore, we derive revenue from providing hosting services, performing donor prospect research engagements, selling lists of potential donors, and providing benchmarking studies and data modeling services.
We completed our acquisition of Convio on May 4, 2012 for $335.3 million in consideration. The acquisition was funded through both cash on hand and borrowings under our credit facility. During the second quarter of 2012, we remained focused on integrating the Convio operations as well as our business optimization and re-engineering efforts that we commenced early in 2012.
Overall, revenue in the second quarter of 2012 and the first six months of 2012 increased 17% and 14% compared to the same periods in 2011, respectively. When removing the impact of revenue from acquired companies, revenue increased by 5% and 7% during the second quarter of 2012 and the first six months of 2012, respectively. These increases were principally the result of continued growth in our subscriptions revenue. We continue to experience an increase in demand for our online fundraising as our business shifts towards hosted solutions. Maintenance revenue also contributed to the increase in revenue from maintaining high renewal rates, new maintenance contracts associated with new license arrangements and existing client increases.
Income from operations for the second quarter of 2012 decreased by $16.4 million when compared to the same period in 2011. The decrease in income from operations during the second quarter of 2012 is primarily attributable to: (1) a $2.1 million increase in professional fees associated with consulting and other service providers engaged in our business optimization and re-engineering efforts; (2) an increase in incremental costs associated with our acquisition of Convio of $11.0 million related to transaction costs, integration costs, amortization of intangibles from business combinations and stock-based compensation expense; and (3) an increase of $2.1 million in hosting costs due to incremental investments to improve our hosting services and additional hosting capacity required as a result of the growth in demand for our hosted applications and other online services.
Income from operations for the first six months of 2012 decreased by $20.9 million when compared to the same period in 2011. The decrease in income from operations during the first six months of 2012 is primarily attributable to: (1) a $4.5 million increase in professional fees associated with consulting and other service providers engaged in our business optimization and re-engineering efforts; (2) an increase in incremental costs associated with our acquisition of Convio of $12.1 million related to transaction costs, integration costs, amortization of intangibles from business combinations and stock-based compensation expense; and (3) an increase of $3.1 million in hosting costs due to incremental investments to improve our hosting services and

21


Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


additional hosting capacity required as a result of the growth in demand for our hosted applications and other online services.
We ended the second quarter of 2012 with cash and cash equivalents totaling $21.2 million and $259.6 million in outstanding borrowings on our credit facility. During the first six months of 2012, we generated $10.9 million in cash flow from operations, paid $10.8 million in dividends and used $11.6 million to purchase computer equipment and software. Additionally, during the first six months of 2012, we used $20.5 million of cash on hand and net borrowings of $259.6 million to acquire Convio.
During the second quarter of 2012, we experienced overall growth in revenue. However, we continue to believe the pace and impact of economic recovery on the nonprofit market remains uncertain. We expect that our operating environment will continue to be challenging for the remainder of 2012 as existing and prospective customers remain cautious in their expenditure decisions. Notwithstanding these conditions, we remain focused on execution of our key growth initiatives and strengthening our leadership position, while achieving our targeted level of profitability.
We also plan to continue to invest in our back-office processes, the infrastructure that supports our subscription-based offerings and certain product development initiatives to achieve optimal scalability of our operations as we execute on our key growth initiatives.

22


Blackbaud, Inc.
Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)


Comparison of the three and six months ended June 30, 2012 and 2011
Results of operations
During the fourth quarter of 2011, we revised previously issued financial statements to correct errors we identified principally related to revenue recognition, accounting for income taxes and the capitalization of software development costs. None of the revisions were material to the periods impacted, as disclosed in Note 14 of the consolidated financial statements included in this quarterly report.
We have included the results of operations of acquired companies in our consolidated results of operations from the date of their respective acquisition, which impacts the comparability of our results of operations when comparing 2012 to 2011. We have noted in the discussion below, to the extent meaningful, the impact on the comparability of our consolidated results of operations due to the inclusion of acquired companies.
We acquired Everyday Hero Pty. Ltd. (Everyday Hero) in October 2011 and Public Interest Data, LLC (PIDI) in February 2011. We completed the acquisition of Convio on May 4, 2012. From the date of acquisition through June 30, 2012, Convio's total revenue was $10.6 million and cost of revenue was $7.3 million.
Revenue
The table below compares revenue from our consolidated statements of comprehensive income for the three and six months ended June 30, 2012 with the same period in 2011.
 
Three months ended June 30,
 
 
 
 
 
Six months ended June 30,
 
 
 
 
(in millions)
2012

 
2011

 
Change

 
% Change

 
2012

 
2011

 
Change

 
% Change

License fees
$
4.5

 
$
5.1

 
$
(0.6
)
 
(12
)%
 
$
11.7

 
$
9.7

 
$
2.0

 
21
%
Subscriptions
37.9

 
25.9

 
12.0

 
46
 %
 
66.0

 
49.8

 
16.2

 
33
%
Services
31.8

 
28.3

 
3.5

 
12
 %
 
55.8

 
53.3

 
2.5

 
5
%
Maintenance
33.9

 
32.6

 
1.3

 
4
 %